In 2010… To Roth or Not to Roth?

To Roth or not to Roth. That is the question being contemplated by millions of American’s and their tax preparers. In case you haven’t heard, beginning January 1, 2010, any investor may convert their traditional IRA to a Roth IRA. The current income limitations will be lifted. No IRS income limits will apply or stand in the way of the conversion starting in 2010. So why is this a big deal and should you convert?

Unlike a traditional IRA that grows taxed deferred with withdrawals being taxed as ordinary income, a Roth IRA grows tax-free and when you take money out all withdrawals are tax-free too (assuming you have held your Roth IRA for 5 years or longer and are age 59½ or older).

Unlike a traditional IRA which requires mandatory minimum distributions (by April 1st of the year after the year you turn age 70½), under current law no mandatory withdrawals are required in a Roth. This favors younger investors, those with a long investing time horizon, people in a higher tax bracket, or those that expect to be in one later.

Baby boomers and older investors have good reason to consider a Roth IRA too, especially if they think they won’t have to take money out of their IRA when they retire. Under current tax laws, converting to a Roth, coupled with careful estate and tax planning, could very well save an investor tens of thousands of dollars by reducing the size of their taxable estate. Additionally, with proper beneficiary planning, a surviving spouse could have many years (even decades) of tax-free growth.